Tesla shares just got their third downgrade in just a few days.
And for more or less the same reason: the future success of the company is “priced in.”
The idea behind the phrase “priced in” — one of the most common terms used by analysts — is that if stock prices reflect the future earnings power of a company or market, then at a certain point the current price reflects all that opportunity.
In a note released Wednesday, Pacific Crest’s Brad Erickson downgraded his rating on the stock to “Sector Weight” from “Overweight,” and pegged its fair value at $US293.
In his note, Erickson echoes something that Deutsche Bank analysts have said in the past and that Bank of America Merril Lynch wrote last Thursday: Tesla is a great company with plenty of upside potential, but the stock already has a lot of that priced in.
Erickson writes (emphasis added):
TSLA remains one of the most innovative stories in all of automotive. From root-level technology and manufacturing all the way to sales and marketing, distribution and executive management, Tesla’s differentiation relative to its peer group is nothing short of total. We simply believe the stock price now more fully
reflects these core attributes. Upside potential remains, as evidenced by our fair-value estimate, but recent appreciation has created a more balanced risk/reward profile, which prompts us to downgrade to Sector Weight.
Erickson noted that sentiment about the company has turned around for the better in the last six months.
There had been concerns over cheaper oil prices and how this would impact the electric and vehicle industry. However, there’s a broader shift to greener energy, and so that sentiment was going to change anyway, according to Erickson.
There had been several reports last year and in early 2015 about Tesla losing to the competition. But as long as established car makers are focusing on hybrids or their traditional models, Erickson Tesla should be fine. Also, Erickson notes that sales centres are saying it looks like there will continue to be strong demand for a while.
But all this raises the stakes for Tesla for the rest of 2015. The “2H15 bar looks high,” Erickson writes.
The launch date of Model X is still uncertain, although the company delivered a record number of cars in the second quarter — 11,507.
Erickson estimates Tesla will deliver between 20,000 and 21,000 cars in the fourth quarter.
“We believe Tesla can achieve these numbers; however, upside, which may be required to move the stock higher, appears unlikely, in our view,” Erickson writes.
Tesla shares fell more than 3% in early trading on Wednesday; the stock is up 18% over the past 12 months.